Why there is no SS trust fund.

[Meadmaker]

In a different thread, the subject of what to do about Social Security has come up. It isn't directly related to the Presidential election, yet, but it's bound to come up. Because of that, I will keep this thread in this forum.

I want to explain why the Social Security Trust Fund is pretty much a myth, with little or no significance. There is something called the Social Security Trust Fund, and people have asserted that it represents savings today in order to offset future deficits in inputs when baby boomers retire and the baby bust generation isn't putting in enough to pay the bills. It would be nice if that were true, but it isn't, and I'll illustrate why in this thread.

The key problem is that the trust fund invests in government securities, which means that the institution that saves the money is the same instution that pays it. It doesn't work. To see why, let's follow the money.

I'm going to make up some numbers here, but let us imagine that there is a year in which the Social Security tax takes in 100 billion dollars more than is paid out in SS benefits. Meanwhile, the rest of the government spends 200 billion dollars more than it takes in from income tax and other sorts of government revenue sources. With the SSTF, let's follow that money.

First, on the SS side, a bunch of money comes in, and somewhat less goes out, leaving the government with 100 billion dollars left over. This excess 100 billion is to go into the trust fund, but not in cash. It will go in the form of government bonds. The Social Security Administration takes 100 billion dollars, and buys bonds from the Treasury Department, and puts the bonds away for a rainy day. Now, the Treasury Department has 100 billion in cash that it got when the SSA bought bonds.

Meanwhile, on the rest of the government, the Treasury gets boatloads of money, but it spends even more boatloads. It has to come up with 200 billion dollars to pay the bills. It has 100 billion it got from SSA, so it sells another 100 billion worth of bonds to other sources, and use the proceeds to pay the bills. At the end of the day, there is 100 billion dollars of bonds in SSA, and 100 billion dollars of bonds in other hands.

When that rainy day comes, let's see what happens to the money. Let's imagine that at that point, SS is taking in 100 billion dollars less than what it needs to pay benefits, and the government still hasn't figured out how to balance a budget, so the deficit for the rest of the operation is another 200 billion dollars.

On the SS side, the SSA is 100 billion dollars short, but it has 100 billion in bonds. It redeems them to raise the cash needed, and all is well. The benefits get paid. Meanwhile, the rest of the government needs 200 billion dollars, but that isn't all. The Treasury had to give SSA 100 billion, so now it's 300 billion short. It has an auction and sells 300 billion dollars worth of bonds to pay the bills. So, in the first year, it sold 100 billion, and in the final year it sold 300 billion.

Now imagine there were no trust fund. SS takes in more than it needs the first year, but instead of saving it, it just gives it to the treasury. The treasure need 200 billion, but it got 100 billion from SS, so it has to sell 100 billion in bonds. Later on, the government is running a deficit of 200 billion again, PLUS, SS tax isn't collecting enough for the benefits, so there is an additional 100 billion dollars that has to get paid to SSA unless Congress wants to cut Social Security benefits, for a total of 300 billion, which is raised by selling bonds. 100 billion in the first year, 300 billion in the second year.

Notice that the cash flows are EXACTLY the same, with or without the trust fund. Conclusion: There is no trust fund.

The trust fund is very close to useless. Why very close, instead of absolutely useless? The one thing it accomplishes is that it demonstrates that there is a definite debt involved represented by the promise to pay future generations of retirees. In case one, with the trust fund, the national debt would be 200 billion at the end of the first year, whereas in case 2, it would only be 100 billion. The 200 billion is actually more accurate, assuming there is a real intention to pay future SS benefits. That need to pay really ought to be carried as a liability on the books, which is what the trust fund does. To that extent, it does some good. It makes it much more difficult to ignore the promises made. On the other hand, it contributes nothing to the ability to pay those promises.

 

[Puppycow]

I see what you are saying. Hopefully the economy will continue to grow over the long term and the government learns to balance the budget. If not, it could be a problem.

Do you think that Govt. bonds are a bad investment? Because either the market is dead wrong about the value of bonds, or your analysis is wrong, isn't it? These are the same sort of bonds that private investors can buy, right? No rational investor would pay more for an investment vehicle than available information says it's worth, right?

Also, talking about absolute numbers like 100 or 200 billion doesn't necessarily tell us much. You have to refer to it as a proportion of the GDP to really understand. If the US is going to have a social security problem, then Japan is REALLY going to have a social security problem because every problem the US has Japan has even worse. Their baby bust is worse, Govt. debt is higher.

The only difference is that the Japanese households have about $14 trillion in private savings. The Japanese Government however is super-broke. Tax revenues only cover about half of Govt. spending, the rest is debt. It's somewhat amazing to me that people buy these bonds because they pay almost no interest, but they do. (That's why the huge government debt maybe isn't so bad: low interest on the debt).

 

[Texas]

In a different thread, the subject of what to do about Social Security has come up. It isn't directly related to the Presidential election, yet, but it's bound to come up. Because of that, I will keep this thread in this forum.

I want to explain why the Social Security Trust Fund is pretty much a myth, with little or no significance. There is something called the Social Security Trust Fund, and people have asserted that it represents savings today in order to offset future deficits in inputs when baby boomers retire and the baby bust generation isn't putting in enough to pay the bills. It would be nice if that were true, but it isn't, and I'll illustrate why in this thread.

The key problem is that the trust fund invests in government securities, which means that the institution that saves the money is the same instution that pays it. It doesn't work. To see why, let's follow the money.

I'm going to make up some numbers here, but let us imagine that there is a year in which the Social Security tax takes in 100 billion dollars more than is paid out in SS benefits. Meanwhile, the rest of the government spends 200 billion dollars more than it takes in from income tax and other sorts of government revenue sources. With the SSTF, let's follow that money.

First, on the SS side, a bunch of money comes in, and somewhat less goes out, leaving the government with 100 billion dollars left over. This excess 100 billion is to go into the trust fund, but not in cash. It will go in the form of government bonds. The Social Security Administration takes 100 billion dollars, and buys bonds from the Treasury Department, and puts the bonds away for a rainy day. Now, the Treasury Department has 100 billion in cash that it got when the SSA bought bonds.

Meanwhile, on the rest of the government, the Treasury gets boatloads of money, but it spends even more boatloads. It has to come up with 200 billion dollars to pay the bills. It has 100 billion it got from SSA, so it sells another 100 billion worth of bonds to other sources, and use the proceeds to pay the bills. At the end of the day, there is 100 billion dollars of bonds in SSA, and 100 billion dollars of bonds in other hands.

When that rainy day comes, let's see what happens to the money. Let's imagine that at that point, SS is taking in 100 billion dollars less than what it needs to pay benefits, and the government still hasn't figured out how to balance a budget, so the deficit for the rest of the operation is another 200 billion dollars.

On the SS side, the SSA is 100 billion dollars short, but it has 100 billion in bonds. It redeems them to raise the cash needed, and all is well. The benefits get paid. Meanwhile, the rest of the government needs 200 billion dollars, but that isn't all. The Treasury had to give SSA 100 billion, so now it's 300 billion short. It has an auction and sells 300 billion dollars worth of bonds to pay the bills. So, in the first year, it sold 100 billion, and in the final year it sold 300 billion.

Now imagine there were no trust fund. SS takes in more than it needs the first year, but instead of saving it, it just gives it to the treasury. The treasure need 200 billion, but it got 100 billion from SS, so it has to sell 100 billion in bonds. Later on, the government is running a deficit of 200 billion again, PLUS, SS tax isn't collecting enough for the benefits, so there is an additional 100 billion dollars that has to get paid to SSA unless Congress wants to cut Social Security benefits, for a total of 300 billion, which is raised by selling bonds. 100 billion in the first year, 300 billion in the second year.

Notice that the cash flows are EXACTLY the same, with or without the trust fund. Conclusion: There is no trust fund.

The trust fund is very close to useless. Why very close, instead of absolutely useless? The one thing it accomplishes is that it demonstrates that there is a definite debt involved represented by the promise to pay future generations of retirees. In case one, with the trust fund, the national debt would be 200 billion at the end of the first year, whereas in case 2, it would only be 100 billion. The 200 billion is actually more accurate, assuming there is a real intention to pay future SS benefits. That need to pay really ought to be carried as a liability on the books, which is what the trust fund does. To that extent, it does some good. It makes it much more difficult to ignore the promises made. On the other hand, it contributes nothing to the ability to pay those promises.

What we need is a lock box.

 

[Puppycow]

What we need is a lock box.

Pet peeve: When somebody quotes a huge long post just for a response of a few words.

 

[BPSCG]

Pet peeve: When somebody quotes a huge long post just for a response of a few words.

Amen that.

Good OP, Meadmaker. Let's see how long it takes before the thread gets driven completely off the rails and over the cliff.

 

[Meadmaker]

Do you think that Govt. bonds are a bad investment? Because either the market is dead wrong about the value of bonds, or your analysis is wrong, isn't it?

That's not it. Government bonds are a fine investment. Low risk, low reward. The problem is that when an entity issues a bond, and then buys that bond itself, it isn't an investment at all.

I own some bonds issued by General Motors. General Motors needed some money, so they issued bonds. I bought them. In other words, I gave GM some money based on the promise that they would give it back, with interest, later. They get to use my money for a while, hopefully to make some more money and give some of it to me.

Suppose, instead, that GM issued some bonds, but then bought their own bonds with their own money. They wouldn't have any more money than they started with. Of course, they would have their bonds, but when it came time to redeem those bonds, they would have to pay for them. It would be moving from one account to another.

Not to belabor the point, but in case people don't get this, I'll illustrate differently. In the case of my bond with GM, I can look at it from my perspective and say I have an asset, the bond, worth approximately $10,000. GM got my money, but they have to show on their books a liability, worth about $10,000.

In the case of the Social Security Trust Fund, the government has an asset, bonds, worth (making up a number) 1 trillion dollars. It also has a liability, those bonds, worth 1 trillion dollars. It's a wash. There's nothing saved up, because they saved money with their own debt.

 

[BPSCG]

In the case of the Social Security Trust Fund, the government has an asset, bonds, worth (making up a number) 1 trillion dollars. It also has a liability, those bonds, worth 1 trillion dollars. It's a wash. There's nothing saved up, because they saved money with their own debt.

Ah, but the human ostriches see that and say, "It's money we owe ourselves, so there's no problem!" and stick their heads back in the sand.

 

[Mycroft]

That's not it. Government bonds are a fine investment. Low risk, low reward. The problem is that when an entity issues a bond, and then buys that bond itself, it isn't an investment at all.

I don't know that I agree.

The real issue isn't that Social Security invests in US bonds, but that the spiraling US debt will someday threaten that investment and make repayment impossible.

 

[Puppycow]

Again: it all depends on whether the (net) amount of debt is reasonable compared to GDP. It's kind of like a mortgage. The money I borrowed to pay for my house was about 7 times my annual income. Five years later my income has increased and the debt is now down to about 5 times my income. It is scheduled to be paid off in 30 years. What multiple of the government's "income" (tax revenues) is the debt? Is it reasonable to expect the government's income to increase in the future, as mine has? Plus, the government is immortal (theoretically anyway) and will never "retire." It has pretty good credit, so its borrowing cost is reasonable. I'm pretty sure the government pays lower interest rates than most people's mortgage interest rates.

So compared to a typical mortgage, how serious is the government's debt?

 

[Darth Rotor]

Why there is no SS trust fund.

The Nuremberg Trials.


As to social security:

It wasn't predicated on so many people living to be 85, among other things. Your illustration shows that as an annuity program, it isn't.

DR

 

[BeAChooser]

There is no trust fund.

So in short, the Social Security Administration has been lying to us for decades.

And Obama and the democrats want to give them even more money (his proposal not to cap SS earnings on those earning over $250,000 a year) without asking for any real reform.

Figures.

Democrats even fought Bush's proposal to allow contributors to allocate roughly 1 percent of total new SS contributions into Personal Retirement Accounts. And publically lied about the effect of doing that (See Pelosi's and Reid's statements). That's because they don't want reform. They want an SS system that guarantees people will remain poor and dependent ... and, therefore, mostly democrats.

 

[BeAChooser]

As to social security: It wasn't predicated on so many people living to be 85

Why not? They could have looked at data on life expectancy back in 1935 (http://www.elderweb.com/images/pages/stats.gif ) and easily predicted it would be 60 - 70 by 1960-1970. There was no sign in the data of life expectancy increases leveling off. And by 1960, they had every reason, looking at the data and modern technology to expect life expectancies of 85. And now we should be thinking in terms of 100 or more. Sorry, claiming the system wasn't predicated on so many people living so long is not an excuse for them designing a really, really inefficient program that didn't even meet what it set out to do in the 1960's.

Your illustration shows that as an annuity program, it isn't.

The Committee on Economic Security was the group that was instrumental in the creation of the SS system. Here's a KEY document they wrote back then and an excerpt from it. Note the portion that is bolded where they describe the forced contribution portion as an annuity program.

http://www.ssa.gov/history/reports/ces/ces5.html

OLD-AGE SECURITY

To meet the problem of security for the aged we suggest as complementary measures non-contributory old-age pensions, compulsory contributory annuities, and voluntary contributory annuities, all to be applicable on retirement at age 65 or over.

Only non-contributory old-age pensions will meet the situation of those who are now old and have no means of support. Laws for the payment of old-age pensions on a needs basis are in force in more than half of all States and should be enacted everywhere. Because most of the dependent aged are now on relief lists and derive their support principally from the Federal Government and many of the States cannot assume the financial burden of pensions unaided, we recommend that the Federal Government pay one-half the cost of old-age pensions but not more than $15 per month for any individual.

The satisfactory way of providing for the old age of those now young is a contributory system of old-age annuities. This will enable younger workers, with matching contributions from their employers, to build up a more adequate old-age protection than it is possible to achieve with non-contributory pensions based upon a means test. To launch such a system we deem it necessary that workers who are now middle-aged or older and who, therefore, cannot in the few remaining years of their industrial life accumulate a substantial reserve be, nevertheless, paid reasonably adequate annuities upon retirement. These Government contributions to augment earned annuities may either take the form of assistance under old age pension laws on a more liberal basis than in the case of persons who have made no contributions or by a Government subsidy to the contributory annuity system itself. A portion of these particular annuities will come out of Government funds, but because receipts from contributions will in the early years greatly exceed annuity payments, it will not be necessary as a financial problem to have Government contributions until after the system has been in operation for 30 years. The combined contributory rate we recommend is 1 percent of pay roll to be divided equally between employers and employees, which is to be increased by 1 percent each 5 years, until the maximum of 5 percent is reached in 20 years.

There still remains, unprotected by either of the two above plans, professional and self-employed groups, many of whom face dependency in old age. Partially to meet their problem, we suggest the establishment of a voluntary Government annuity system, designed particularly for people of small incomes.

They clearly sold the concept as an annuity program, DR.

 

[BPSCG]

I've occasionally wondered whether they had even the remotest possible chance of being able to predict the eventual, inevitable collapse of the system under its own weight. Today we have sophisticated computer systems that can calculate "what-if" scenarios in a fraction of a second; in 1935, all they had was mechanical adding machines. Even if they could predict that the average lifespan would be well into the 70s in less than a generation, who could possibly have done the math to calculate the effect of the increase in longevity on the system's financial health? And that's just one factor. Throw in variables such as inflation and reduced birth rates, and you have something that nobody in 1935 could possibly have calculated; they didn't even have a simple automated spreadsheet.

All that could know was that with increasing longevity, the ratio of retirees to workers would rise. But at what point would the system become unsustainable?

 

[BeAChooser]

I've occasionally wondered whether they had even the remotest possible chance of being able to predict the eventual, inevitable collapse of the system under its own weight. Today we have sophisticated computer systems that can calculate "what-if" scenarios in a fraction of a second; in 1935, all they had was mechanical adding machines. Even if they could predict that the average lifespan would be well into the 70s in less than a generation, who could possibly have done the math to calculate the effect of the increase in longevity on the system's financial health?

Oh please. The formulas aren't that involved. You can do the calculations on a slide rule (they had them back then). And do you think insurance companies back then didn't routinely do such calculations?

 

[Darth Rotor]

They clearly sold the concept as an annuity program, DR.

An annuity program with a short payout, which has since been saddled with condiserably more claims against it.

Any annuity I set up for myself I have to put the funds into so that I may draw them out. As set up, SS doesn't do that. That is why I said it isn't an annuity.

How it was sold is NOT a mystery to me. How it's been abused (thanks LBJ and friends) is another story.

Sorry, claiming the system wasn't predicated on so many people living so long is not an excuse for them designing a really, really inefficient program that didn't even meet what it set out to do in the 1960's.

Since I am not offering an excuse, but rather a criticism, what the hell is your beef with me here, BAC?


DR

 

[Gurdur]

Why there is no SS trust fund.

Because they're all dead? It was after all more than 60 years ago.

_________

Godwinning the thread in novel ways.

 

[Darth Rotor]

Because they're all dead? It was after all more than 60 years ago.

Up in post #10, my response was:

The Nuremberg Trials

Great minds think alike.

Godwinning the thread in novel ways.

Always the rabble rouser, eh?

 

[Meadmaker]

I don't know that I agree.

The real issue isn't that Social Security invests in US bonds, but that the spiraling US debt will someday threaten that investment and make repayment impossible.

There are several "real issues" involved with Social Security. The one that this thread is addressing is the fact that the "savings" in the trust fund are debt instruments from the same entity that is saving. Therefore, there are no real savings.

There are promises, which are a tiny bit better than nothing.

I know it sounds a bit bizarre to look at a fine, conservative, well trusted investment, i.e. government bonds, and say that it is not an investment at all, but that is, in fact, the case. When you buy a government bond, it's an investment. When the government buys a government bond, it's an accounting gimmick.

 

[Meadmaker]

All that could know was that with increasing longevity, the ratio of retirees to workers would rise. But at what point would the system become unsustainable?

Is it unsustainable now? Raise taxes.

The bottom line is that there are more old people living longer past the point at which they simply cannot hold a job as a taxpayer. Those people want to eat, and even have a home and medicine. That means some young people will have to spend their days growing food, making products, and providing services that these old, no longer productive, people are using.

Clear your mind of thoughts of money for just a moment. Money is just a way of keeping score. The real economy consists of goods and services, and for the next few decades a significant fraction of that economy is going to be shifted into providing for the needs of elderly people. No lock box, public or private, is going to change that.

 

[BeAChooser]

Any annuity I set up for myself I have to put the funds into so that I may draw them out. As set up, SS doesn't do that. That is why I said it isn't an annuity.

I won't argue with you. It's not an annuity either. But that's the way they originally sold it to the country. As an annuity for workers.

It also isn't an insurance program like many and the SSA here now claim. It doesn't look or act anything like an insurance company. The risk it supposedly insures against is something that most people will actually experience (i.e., old age and retirement) as opposed to a serious car accident or a house fire.

What it is ... is mostly welfare (not that welfare is a bad thing) and broken promises.

Since I am not offering an excuse, but rather a criticism, what the hell is your beef with me here, BAC?

Apparently none.